[This blog post is an excerpt from a commentary published last week at https://speculative-investor.com/]
The ‘super’ El Niño currently underway has contributed and will continue to contribute to extreme weather events or very unusual weather conditions, including reduced rainfall (and potentially severe drought) throughout Asia and an absence of Atlantic hurricanes. One of the likely future effects will be a relatively mild US winter. At least, that has been a result of a strong El Niño in the past. However, as discussed in a recent Bloomberg article, the greater the strength of the current El Niño, the greater the risk that historical weather and climate patterns will not be a reliable guide to the future.
The Bloomberg article linked above points out that traders have been betting for a few months now that a strong El Niño will deliver a mild US winter. Apart from the markets that facilitate direct betting on or hedging of future weather, this has been evident in the US natural gas (NG) futures market, where the total speculator net-short position is at its highest level since March-2020 and not far from a 20-year high.
Partly in response to speculation that the coming winter will be unusually mild, the January-2027 NG futures contract is at its lowest level in more than four years. Here’s a daily chart covering the past 12 months:
A relatively mild winter is the most likely outcome, but with this outcome already factored into current prices there is the potential for even an average winter to bring about a meaningful rally in the NG price. Also, the war in the Middle East has caused the price of NG in Europe to almost triple, resulting in Europe’s benchmark NG price now being almost 9-times the NG price in the US and creating an incentive to export as much Liquefied Natural Gas (LNG) as possible from the US. While this currently does not provide us with a set-up for a short-term NG trade with an attractive risk/reward, additional weakness or sideways movement in the price over the coming 1-2 months could generate such an opportunity.
